Price-level targeting better than IT
Moving to price-level targeting from inflation targeting is welfare enhancing when imperfect credibility is short-lived, a new paper from the Bank of Canada posits.
The research shows that a transition from one regime to another is likely to destabilise the private sector's expectations regarding the monetary policy regime. The analysis shows that only very long spells of imperfect credibility, 13 years and more, could undermine the benefits of switching to price- level targeting.
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